6/04/2009 @ 4:00PM

Building America's Power Grid

The stimulus bill recently signed by Barack Obama contains $11 billion dollars “to create a bigger, better, smarter electric grid” with “tens of thousands of miles of new, high-voltage national transmission.” Upgrading the electricity grid to handle the demands of a 21st-century economy is not only a worthwhile goal but a clear federal priority. The fear is the Obama administration won’t know how to do it (see “Why A New Power Grid Will Pay.”)

The good news, for now at least, is that in a gargantuan bill designed to throw money at every priority a politician can dream up, taxpayers might not overspend for the grid. While $11 billion sounds like a lot of money, industry leaders put the figure needed for fixing the grid at roughly $60 to 75 billion. Is Washington’s contribution the seed money to get things started or just a down payment on what the Treasury will ultimately dole out?

The irony in the stimulus package’s approach to grid investment is that private industry has long made clear its willingness to spend its own money to fix the grid, as long as Washington allows utilities and transmission companies to do it the right way. What the industry actually needs from Washington to fix the grid isn’t money, but leadership.

That leadership can’t come soon enough. Even with robust energy-efficiency and conservation measures, the U.S. economy will require 30% more electricity by 2030. As energy expert and former Democratic Congressman Glenn English points out, that’s the equivalent of adding four Californias to an antiquated and overly strained power grid.

In recent years, we’ve seen rolling blackouts plague Western states and massive power outages plunge Miami and the Northeast into darkness. If the grid is incapable of handling our problems today, how much worse will it be two decades from now, when demand has jumped nearly one-third?

The growing chorus to add cleaner, renewable sources into our power mix exacerbates this challenge. Wind and solar currently provide less than 1% of our electricity. Boosting that figure will necessitate building installations in distant locales, like the deserts of the Southwest or the windswept prairies of the Dakotas. Last year, a Bush administration report garnered headlines for suggesting wind could supply 20% of our electricity by 2030. Less noted, but just as critical, was the report’s call to construct a “transmission superhighway.”

Today, that superhighway is at a dead end. Tufts economist Gilbert Metcalf points out that the tax code taxes income from investments in transmission more heavily than other income, which is one reason companies have been reluctant to pour money into needed upgrades.

Moreover, Clinton-era regulations forced utilities to split themselves into transmission companies, the rates of which were still regulated, and generation companies, with rates that no longer were. With rates strictly regulated (a prerogative jealously guarded by authorities at the state level), transmission companies lacked incentive to invest in the maintenance and upkeep of their wires.

To access the needed investment for upgrades, we must reform those existing regulations. We should start by bolstering the regulatory authority of the Federal Energy Regulatory Commission. First, give the FERC siting authority for worthy interstate transmission projects. Like other forms of interstate commerce, transmission shouldn’t be held hostage by the parochial concerns of local regulators. FERC has the ultimate authority to site when it comes to natural gas pipelines. Why not electric power lines as well?

Just as importantly, FERC should have widespread pricing authority to allocate the costs of large-scale transmission projects. Transmission rates are customarily determined by state public service commissions. But who should pay for wires that cross state lines? Figuring out which ratepayers to bill and how to bill them is a crucial political challenge–another example of the leadership required in the Obama era.

Sorting out this regulatory tangle and giving private companies proper incentives to invest will yield fantastic results. Manhattan Institute scholar Peter Huber recently sketched out the idea of “a backbone grid built with state-of-the-art, high-voltage technology and spanning the continent [that] could readily move 25% of America’s power over very long distances, at a cost well under 0.5 cents per kilowatt-hour moved.”

That’s the transmission superhighway of the future. It can open markets to the cheapest power, no matter how far away. It will allow renewables an on-ramp to the grid. It will strengthen America’s energy security by facilitating the electrification of the economy.

It doesn’t require government handouts–just a revamped, common-sense regulatory structure.